2016-11-29

If you're looking at nominal GDP figures for the last few years, you'll notice a weird thing. Most of the world seems to be in a slump. Canada's GDP has decreased by 20%, UK's GDP has decreased by 15%, Germany's GDP is down by 10%, Japan, same story. Even fast-growing economies like South Korea, Armenia, Vietnam and India have stalled at their 2014 levels.

There are a few exceptions though. The US is still growing as normal. China and Hong Kong as well, though China's had a slight dip in its growth rate. Not to be outdone, Grenada's growing at a good clip, ditto for other East Caribbean states.

What's going on? Here'a graph that explains things:

The USD has appreciated like crazy against other currencies over the last couple of years. If your currency is the USD or fixed to the USD, everything seems to be as usual: economic growth is steady, things are normal, all is well. Imports from other currency areas are cheaper, but your exports are getting more expensive.

If your currency is tracking the US dollar, but isn't fully fixed to it, you'll see something like China. A slowdown in growth, exports get more expensive, imports are a bit cheaper. Enough to get some downcast news articles going on.

If your currency is floating free against the dollar, the sky is falling. Your GDP has just crashed by 20%, your economy is shrinking like a dried grape, the good times are behind you and all that's left is a grim meathook future where you hunt cockroaches and scavenge carrion left behind by the radioactive mutant wolves. On the plus-side your exports are cheap and popular.

But, well, this has happened before. Here's the chart from 2000-2002:

And here's what happened over the next two years.

What goes up, must come down. Another example of this was around the 2008 crash. First the USD depreciated 25% against the euro over two years. Then the sub-prime crisis hit, and the USD appreciated 25% over two years.

Exchange rates go up and down. There are usually some reasons for why, but in the long run reversion to mean takes over. If the USD gets too expensive due to policy differences, either the US changes its policy to make the USD cheaper, or other economies change their policies to make their currencies more expensive.

Even if there is some real "the entire US economy figured out how to 1.5x the productivity of a person, therefore the rest of the world is doomed"-thing going on, it's not a lasting effect. The rest of the world is going to do the same thing. If you've got super good 3D printers and robots and AI and automated manufacturing and design to make the 300 million people in the US as productive as 1.4 billion Chinese, what's to prevent the Chinese from using the same tech and becoming as productive as 6 billion non-augmented Chinese. If you force-multiply people, you force-multiply people.

2016-11-25

Europe's not doing so great. Eastern Europe is 10x poorer than the US, Bulgaria is even poorer than China by nominal GDP per capita. Even rich countries in Europe are poor compared to the US, with just 70% of the nominal GDP per capita.

Wait, what? Didn't you just write yesterday that everything is fine, don't worry? Welcome to the land of currency exchange rates. The US dollar is valued at levels unseen since the early 2000s, so suddenly everyone else gets thrown into the poorhouse. A few years earlier, the dollar was valued a third lower, so the story was that EU was an economic juggernaut, eclipsing the US economy. Now the USD/EUR exchange rate is nearly even, and the story is that the US is an unstoppable economic powerhouse, and the EU's economic policy is one of total and utter failure.

What's going on then? Exchange rate fluctuations? One day you're rich, the next you're poor, the day after tomorrow you're rich again.

There are a couple historical analogies to this situation. Both helpfully involving the US as one of the economies involved. First time around, there was the Soviet Union. A serious economic competitor to the US. The USSR had a population 20% larger than the US, but it was culturally fragmented and started off significantly poorer, so it never really reached the total economic bulk of the US before it got sideswiped by Japan into the third place in the late 1980s. Japan was clocking massive annual growth rates at that point and overtook the Soviet Union, despite having only half the population. And Japan kept on growing. At the peak of the Japanese bubble, Japan's GDP per capita was higher than the US one and there was all sorts of crazy talk of the Japanese buying up the entire United States and becoming the largest economy in the world by 2005. Then the bubble burst and Japan was pushed to the third place by the new-born European Monetary Union.

So, is this history repeating itself? Is the EU in a valuation bubble, which burst during the euro crisis, and now the Union is going to disintegrate and disappear from the world stage, much like USSR and Japan? While the situation is a bit similar to the one with the Soviet Union, as both the EU and the USSR are culturally and politically fragmented economies that started off poorer than the US, there are some crucial differences. First off, the population of the EU is about 50% larger than the US, making it harder to overtake without veering into bubble territory. Second, a significant chunk of the EU is made up of historically rich countries, who should know how to manage an economy. Third, the EU GDP per capita has never exceeded that of the US, so it's less likely that we're experiencing a wild valuation bubble bursting. The euro crisis did have a valuation bubble involved in it, but it was confined to the newly-rich fast-growing South Europe and Ireland.

Taken together, these points make it less likely that we're witnessing a USSR / Japan -style situation where the other economy crashes, the US recovers from a slump, and returns to being the biggest economy. In fact, it feels a bit like the Japanese situation, but with the US in Japan's position. You've got a tightly integrated economy with a smaller population overtaking a more loosely-bound economy with a significantly larger population.

At the same time, China has passed both the US and EU to become the largest economy by GDP PPP (and a nominal number one in a few years). At 3x the population size of the EU and a faster-growing economy, China's going to be number one with a comfortable margin for a good while.

With that in mind, you could also think of this as a larger-scale re-enactment of the 1990s. In that scenario, the US would pass the EU in GDP to retake the number two position after China. The resulting shock would cause the EU to disintegrate USSR-style while the US surfs an asset bubble. In a few years, some "let's create a counterweight to China" economic union comes online, overtakes the US and the US asset bubble bursts.

So you've got a weird situation. On one hand, the US and EU are nominally the number 1 and 2 economies in the world, waiting to be passed by China. On the other, they're numbers 3 and 2 by PPP. This is playing out in both empires crumbling in various ways, instead of the more usual "number 3 disintegrates as number 1 and 2 turn on it." Brexit pulling the UK out of the EU, Canada-EU trade deal pulling Canada towards Europe, US talk about breaking up NAFTA, SE Asia pivoting away from the US, EU neighbors dropping plans to join the Union, California fringe movements lobbying for Calexit, and a Eurasian pivot towards China.

Things are going well in Europe. The difference in GDP per capita (PPP) between rich and poor EU countries is shrinking. The average EU GDP per capita (41k) is somewhere around South Korea (39k) and Japan (39k).

The high-GDP EU countries are grouped around 45-50,000 PPP dollars per capita, with a few outliers. Starting from the top, Luxembourg (102k) and Ireland (69k) are a bit special: both are tax havens, which inflates their figures significantly by routing a lot of money through the economy with very little sticking around. Up next is Netherlands (51k), also a bit tax havenish. Then we get to the rest of the list, composed of Sweden (50k), Austria (48k), Germany (48k) and Denmark (47k). Belgium (45k) rounds up the list.

We can (and probably have to in a few years) extend the middle-income group with some fast-growing countries falling just short of the 30k divider: Portugal (29k), Poland (28k), Hungary (27k), Greece (27k) and Latvia (26k).

The sub-25k category is composed of new member states. Led by newcomer Croatia (22k), fast-growing Romania (22k) and Bulgaria (20k) finish the list.

To understand this number mess a bit better, let's do a historical comparison. Bulgaria is now at a similar GDP per capita level as the UK was in 1994 (or Sweden in 1991). Poland and Greece are like the UK was in 2001. Czech Republic is like the UK was in 2005. Italy and Spain are like the UK was in 2010. Today's Germany is like the UK might be in 2020. The Netherlands is like the UK in 2026. The EU as a whole is at a similar GDP per capita level as the US was in 2004.

Ten years ago in 2006, the difference in GDP per capita between the Netherlands and Bulgaria was 3.2x. Now the difference has come down to 2.55x, as Bulgaria's economy has caught up with the rest of the Union.

Compared to the US, the EU economy is oscillating at the usual 68-70% range per capita. The exceptional performance of the US economy is weird as usual, it's hanging out with petrostates, tax havens and finance-driven city-states, while having a large population. How does that happen? Is it real? How to replicate it? Who knows.